Suncor Uses Rail, New Pipelines to Drive Profit to Record

It’s a long way to send oil from Canada’s landlocked province of Alberta to refineries on the coasts. For Suncor Energy Inc. (SU), that can have its advantages: record profit.

Canada’s largest oil producer by market value moved more crude by rail and on new pipelines like TransCanada Corp. (TRP)’s Gulf Coast system to earn higher prices and reduce its refining feedstock costs in the first quarter.

Like other companies producing bitumen from Canada’s oil sands, Suncor is slowly expanding its shipments to coastal markets while it waits for pipelines like TransCanada’s Keystone XL and Enbridge Inc.’s Northern Gateway to be built. In the meantime, the company is cobbling together a system of rail transport and space on new and existing lines to help booming North American output reach markets.

“We commenced shipping on the Gulf Coast project in the first quarter and we immediately began to experience considerable price lift,” Chief Executive Officer Steve Williams said during an earnings conference call today.

The strategy helped produce record earnings for Calgary-based Suncor in the quarter. Both operating profit at C$1.793 billion ($1.63 billion), or C$1.22 a share, and cash flow from operations at C$2.88 billion were quarterly records, Williams said in a statement yesterday.

Suncor rose 3.3 percent, the most since August, to C$42.70 at 10:12 a.m. in Toronto. The company has gained 14 percent this year.

Shipping Crude

Suncor shipped as much as 70,000 barrels per day of crude, or about 13 percent of its output, on the Gulf Coast system in the first quarter. At the same time, it used rail cars to supply its refinery in Montreal with 20,000 barrels a day of cheaper Canadian oil, replacing more expensive imported feedstock.

The company saved C$20 million at the Montreal refinery by using cheaper North American crude in the quarter, interim Chief Financial Officer Steve Reynish said during the conference call. By next year, Suncor will be able to supply the refinery entirely with oil from Canada and the U.S., he said.

Canada’s oil producers have had to work around transportation delays that risk slowing the pace of an estimated C$32 billion in oil-sands investments this year. Keystone XL, first proposed by TransCanada in 2008, has been delayed at least three times, most recently on April 18 by the U.S. State Department. Enbridge’s Northern Gateway, which is opposed by aboriginal and environmental groups, is awaiting approval from Prime Minister Stephen Harper.

Transportation Bottlenecks

Other pipelines that have been proposed to cope with surging production of oil-sands crude include Kinder Morgan Energy Partners LP’s Trans Mountain and TransCanada’s Energy East.

Working around transportation bottlenecks helped increase prices in the first quarter for North American crudes. West Texas Intermediate averaged $98.61 in the quarter, 4.5 percent higher than a year earlier, while Western Canada Select, the benchmark for the heavy crude, averaged 16 percent higher at $77.76.

Oil-sands production is forecast to almost triple to 5.2 million barrels a day by 2030 from 1.8 million barrels a day in 2012, according to the Canadian Association of Petroleum Producers, an industry lobby group. Currently, most of Canada’s oil is shipped to the U.S.

Suncor is the first major Canadian oil producer to report earnings this quarter. Cenovus Energy Inc. and Imperial Oil Ltd. are scheduled to release quarterly results this week.

To contact the reporter on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; David Scanlan at dscanlan@bloomberg.net Tina Davis, Carlos Caminada

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